Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%. 0 1 2 3 4 Project A -1,050 700 350 270 320 Project B -1,050 300 285 420 770 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years

Answer 1

Project A
Year	Cash Flows	Cumulative Cash Flows
0	-1050	-1050
1	700	-350
2	350	0
3	270	270
4	320	590
Hence, payback period = 2 years
Project A
Year	Cash Flows	PVF	Discounted cash flows	Cumulative Cash Flows
0	-1050	1	-1050	-1050
1	700	0.925925926	648.1481481	-401.8518519
2	350	0.85733882	300.0685871	-101.7832647
3	270	0.793832241	214.3347051	112.5514403
4	320	0.735029853	235.2095529	347.7609932
Hence, discounted payback period = 2+ 101.78/214.33 = 2.4749 years

Project B
Year	Cash Flows	Cumulative Cash Flows
0	-1050	-1050
1	300	-750
2	285	-465
3	420	-45
4	770	725
Hence, payback period = 3+45/770 = 3.06 years
Project B
Year	Cash Flows	PVF	Discounted cash flows	Cumulative Cash Flows
0	-1050	1	-1050	-1050
1	300	0.925925926	277.7777778	-772.2222222
2	285	0.85733882	244.3415638	-527.8806584
3	420	0.793832241	333.4095412	-194.4711172
4	770	0.735029853	565.9729867	371.5018694
Hence, discounted payback period = 3+ 194.47/565.97 = 3.34 years